Why exactly did Citigroup’s CEO get a raise in 2013?

FORTUNE — It’s hard to make waves anymore in the lavish realm of executive compensation, where shock value evaporated long ago. But Citigroup C did just that on Thursday when it increased the compensation of CEO Michael Corbat by an estimated 23%.

It wasn’t the dollar amount that was so surprising. Corbat earned $14.1 million in 2013, up from $11.5 million in 2012. What was so puzzling was that it seemed that he’d done so little to deserve it.

The regulatory filing that revealed Corbat’s compensation came about a month after Citigroup’s reported fourth-quarter earnings in which profit jumped 21% but still missed analyst’s estimates. Its earnings of $2.6 billion, or 82 cents a share, came up short of Wall Street’s expectations, which had expected earnings of 95 cents a share. Revenue at the bank slipped 1%, to $17.8 billion. The latest earnings report closed out Corbat’s first full year at the helm of the nation’s third-largest bank. When he took the reins from Vikram Pandit in October 2012, Corbat promised to increase profitability and efficiency at the firm, which had become deeply entrenched in the morass of the Great Recession. If the fourth-quarter earnings are any indication, though, Corbat has yet to make good on those promises.

And while the idea in banking is that year-end bonuses, which typically account for the majority of exec pay, are bestowed based on an employee’s performance, merit isn’t the only thing that matters.

At the executive level, “there’s explicit benchmarking that goes on. Banks consider how their [CEO] pay compares with other banks, like J.P Morgan, Wells Fargo, and Bank of America,” says David Larcker, a professor at the Stanford Graduate School of Business.

And this year, there was a race to keep with the going rate.

Earlier last week, Bank of America BAC boosted the compensation of CEO Brian Moynihan to $14 million, up 17% from last year. Jamie Dimon, CEO of J.P. Morgan JPM, saw his pay jump a staggering 74% to $20 million, a year after the bank slashed his salary by more than 50% following big losses from the company’s “London Whale” derivatives trade. Goldman Sachs GS awarded Lloyd Blankfein $23 million in total compensation in 2013, up 9.5% from 2012’s sum. Morgan Stanley MS, meanwhile, increased CEO James Gorman’s salary to $4.9 million from $2.6 million, and boosted his stock bonus by a whopping 88%.

Keeping up with the market rate is key to attracting executive talent, but it matters just as much further down the corporate ladder. “However much you decide to pay the CEO, that will cascade through the organization,” Larcker says. “We’re looking at the CEO, but implicitly you’re making a judgment with regard to [the pay of] people who will be reporting to the executive group.”

There’s no doubt that $14.1 million is a lot of money, but when you look at the types of compensation that make up that sum, it’s not as extravagant as it seems.

Forty percent of Corbat’s incentive award is cash, the rest is either deferred stock or performance share units, both of which are linked to the company’s ability to meet financial and strategic goals. Citigroup’s compensation committee adopted this pay structure after shareholders voted down the company’s 2011 compensation arrangement.

“Most of this is some sort of long-term payout that depends on how the stock price performs. It’s not, ‘Bang! Here’s the money,’” Larcker says. “[The board] is posing risk on the guy. It’s worth pointing out that those pay units could be worth anything eventually — they could be worth zero.”